On 20 December 2016 the European Commission extended by one year to August 2018 the exemption for pension funds from clearing OTC derivative transactions.
The European Market Infrastructure Regulation (“EMIR”) introduced, amongst other things, the requirement for parties to certain OTC derivative transactions to centrally clear those transactions. However, EMIR provided an exemption for pension schemes from the requirement to centrally clear OTC derivative transactions which were “… objectively measurable as reducing investment risks directly relating to the financial solvency of pension scheme arrangements …” (the “pension scheme exemption”). The exemption was previously scheduled to expire in August 2017.
More generally, in November 2016 the European Commission published a report on, amongst other things, the pension scheme exemption. The report identified that the European Commission should assess whether the pension scheme exemption should be further extended or made permanent. This point is due to be considered during the course of 2017 in a wider ranging legislative review of EMIR.
The date for the application of mandatory clearing requirements for “category three” entities (these include financial counterparties which are not clearing members and belong to a group that does not exceed a specified threshold of non-centrally cleared derivatives) under EMIR may also be extended. A report by the European Securities and Markets Association in November 2016 suggested that this obligation be postponed until June 2019 in light of the difficulties that such entity types have in putting in place the relevant systems to comply with the obligations (relative to the more limited systemic risk posed by such entities). The European Commission is expected to respond to this report during the first quarter of 2017. If this date is extended it may effectively further delay the obligation on pension schemes which are category three entities to clear transactions.
Separately from the clearing obligation, the margining rules under EMIR will require certain counterparties to OTC derivatives not cleared through a central counterparty to put in place new collateral arrangements from early 2017. This obligation would apply to pension schemes notwithstanding the clearing exemption. These margining rules will come into force for most pension schemes from 1 March 2017. Like others in the market, pension schemes will need to ensure their derivatives documentation is updated to comply with the new collateral rules.
For bilateral derivatives relationships, the responsibility to comply with the margining rules rests with the pension scheme. If a pension scheme employs an investment manager, the investment management agreement may provide that compliance is an obligation of the investment manager, but the ultimate statutory responsibility will still rest with the pension scheme.